UK budget deficit barely falls in 2012/13, more pain ahead

Chancellor George Osborne arrives at the International Monetary and Financial Committee (IMFC) meeting during the Spring Meeting of the IMF and World Bank in Washington, April 20, 2013. REUTERS/Yuri Gripas

LONDON (Reuters) - Britain’s budget deficit barely fell in the last 12 months despite a government austerity drive, official data showed on Tuesday, pointing to further pain to come.

The fact borrowing fell at all will be some comfort for chancellor George Osborne, after a week when the International Monetary Fund cast doubt on his policies and ratings agency Fitch stripped Britain of its triple-A status.

But Tuesday’s figures from the Office of National Statistics underscore just how far Britain’s Conservative-led coalition has to go to meet its central goal of balancing the public finances, as weak growth saps tax revenue and raises welfare costs.

“There’s a small crumb to be had from the fact that borrowing is less than last year, but really that’s a political point not an economic one,” said David Tinsley, UK economist at BNP Paribas.

“The government seems to be delivering on spending reductions, but it is failing on getting growth ... and that’s why the fiscal position isn’t improving. It’s flat-lining.”

The government’s preferred measure of public borrowing - which excludes some effects of bank bailouts and a one-off Royal Mail pension transfer - fell to 114.2 billion pounds ($174.1 billion) in the tax year which ended in March.

This equates to 7.4 percent of economic output, down from 7.9 percent in 2012/13, and is well below a peak of 11.2 percent just before the coalition came to power in May 2010.

But it is still far higher than in most other major advanced economies as Britain struggles to deal with the long-term effects of the financial crisis.

The economy has been broadly stagnant for the past two years, and gross domestic product data on Thursday will show whether the economy has slipped back into technical recession for a third time in less than five years.

Most of the fall in government borrowing was due to a scheme that transferred bond interest previously paid to the Bank of England back to the Treasury. Without this, the deficit would only have fallen to 7.8 percent of GDP.

This year the government aims to cut the deficit to 6.8 percent of GDP, but economists warned even this could be hard, especially as some annual spending that would normally have taken place last year has been pushed into the current year.

“The bigger test will be if he can continue to meet the forecasts for the years ahead, and we think it’s looking vulnerable because of the weakness of the euro area, which could decrease tax revenues and mean higher spending pressures.”

PAIN, NO GAIN?

Deficit reduction is already off course in Britain. In 2010 Osborne announced plans to eliminate Britain’s underlying budget deficit by 2014-15, but this now looks unlikely before 2016-17 at the earliest.

This slippage has been largely due to weak growth, but how much is due to the knock-on effect of turmoil in the euro zone, Britain’s main export market, and how much is down to a bigger-than-expected drag from austerity is disputed.

Last week the IMF - previously a champion of Osborne’s policies - said he may need to rethink the pace of deficit reduction due to the failure of growth to pick up, something the opposition Labour Party has been urging for a long time.

Labour economics spokesman Ed Balls reiterated this criticism on Tuesday, saying that the borrowing figures showed that the government’s policies were “totally self-defeating”.

But the government insisted its policies were working, with the deficit down by one-third since 2010 and 1.25 million new private sector jobs created since then.

Tuesday’s data showed that central government spending in 2012/13 was 1.8 percent up on the year, driven by a 5.6 percent rise in social benefits, which include old-age pensions as well as welfare for those out-of-work. Tax revenue rose 1.8 percent.

Full-year borrowing was in line with forecasts from the government’s budget watchdog last month, though the Office for Budget Responsibility warned that Tuesday’s figures could still face major revisions as they were partly based on estimates.

Data for March alone showed that public borrowing excluding financial sector interventions totalled 15.142 billion pounds, down from 16.694 billion pounds a year ago and just below economists’ forecasts of 15.5 billion pounds.

But the UK Debt Management Office revised up its government bond issuance plans for the coming financial year by 4.7 billion pounds to 155.7 billion pounds, after a volatile cash measure of British borrowing turned out higher than expected in March

And Britain’s total net public debt, excluding the direct costs of bailing out the country’s banks, is still much higher than before the financial crisis at a record 1.1858 trillion pounds or 75.4 percent of GDP.